HealthSavings Blog

HSA Or FSA? 3 Tips To Know The Difference

HSAs and FSAs are both tax-advantaged medical savings vehicles, so they can easily be confused. However, they have a few key differences; here are three ways to know whether you have an HSA or an FSA.

If you own the account, you have an HSA.

Like 401(k) plans, FSAs are employer-owned accounts, which means your FSA funds are only yours to spend while you’re with your current employer. If you change jobs or retire, you can’t take your funds with you.

However, HSAs are individually owned, which means that when you make a contribution, those dollars belong to you. You never lose the ability to spend the HSA funds in your account, even if you switch employers, lose HSA eligibility, or stop working. HSA accountholders can contribute with confidence, knowing those funds are theirs to keep.

If the money in your account rolls over, you have an HSA.

FSAs are subject to the use-it-or-lose-it rule, which means unused funds are forfeited at the end of the plan year (although some FSAs now allow accountholders to roll over up to $500 or offer a 2½-month grace period for accountholders to spend any unused funds). Also, FSAs are very limited in when accountholders can change their contributions, which means accountholders often must estimate their medical expenses for the upcoming year when setting their contribution levels.

In contrast, any unused funds in your HSA roll over to the following year; there are no limits on when you’re required to spend those dollars. And unlike FSAs, HSA contribution levels can be adjusted as your needs change, and funds can earn interest over time. No more guessing medical costs on the front end or rushing to spend funds before the end of the year; HSAs give you a simple, secure way to save for both current and future healthcare expenses.

If you’re investing money in your account, you have an HSA.

FSAs are tools to help accountholders save taxes on their current medical expenses. Because of their rollover limits and inability to earn interest, they can’t function as long-term investing vehicles.

However, HSAs are not only able to be used to pay for current medical costs tax-free, they are also powerful investing vehicles. You can invest your HSA and let it grow long-term to cover future expenses in retirement, just like a 401(k) or IRA. And, rather than paying for retirement healthcare costs from your 401(k) and having that money taxed, an investment HSA allows you to cover those expenses tax-free. Also, once you’re 65, you can use HSA funds for non-medical expenses with no tax penalty; you just pay regular income taxes like you would with a 401(k).